The White House May Have To Stretch The Wall Street "TARP" To The Auto Industry
Friday, December 12, 2008SUSIE GHARIB: New hope tonight for Detroit's big three, as the Bush administration says it's ready to lend money to the ailing auto makers. The U.S. Treasury is considering a short-term loan to General Motors and Chrysler to keep them in business into the new year. A decision could come this weekend. We have two reports tonight looking at why the White House is driving the auto bailout plan and the implications for the U.S. economy if those efforts fail. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Bush administration says it will act to quote, prevent a precipitous collapse of the U.S. auto industry before a new Congress begins work in January. That language opened the door to everything from a bridge loan using Treasury bailout funds to some sort of government-financed bankruptcy filing. Ford has said it doesn't need government cash to survive, but Senate Banking Committee Chairman Chris Dodd said he was confident the administration would not allow GM or Chrysler to simply go out of business.
SEN. CHRIS DODD, BANKING COMMITTEE CHAIRMAN: My hope is they would provide enough resources to get us through to the end of the first quarter, adequate time to work at this.
GERSH: GM says it needs $8 billion to get through the end of January, Chrysler about the same. To conserve cash, GM will now close 20 plants next month, cutting production by a quarter million vehicles. With talks in Congress at a dead end, United Auto Workers President Ron Gettlefinger says pressure is building from parts suppliers who are demanding to be paid in cash. He compared that to a financial panic.
RON GETTELFINGER, UAW PRESIDENT: We need to satisfy the suppliers that there is going to be a tomorrow. I think the run on the banks is a much bigger issue than anybody here realizes.
GERSH: The auto parts industry is now asking the Treasury to guarantee the auto makers will be able to pay their suppliers. Ann Wilson represents suppliers and says without that guarantee, banks are cutting off credit.
ANN WILSON, SR. VP, MOTOR & EQUIPMENT MANUFACTURERS ASSN.: If they are no longer able to borrow off of their receivables, we're going to have suppliers who are not going to be able to function going forward, there's no doubt about it.
GERSH: Before talks collapsed, congressional negotiators had reached a deal calling for auto company bond holders to slash company debt by two thirds. The auto union had also agreed to accept stock instead of cash payments to the so-called veba (ph), the plan that funds retiree benefits. Senator Bob Corker of Tennessee urged the Bush administration to build on that agreement.
SEN. BOB CORKER (R) TENNESSEE: Look, if you're going to do this, please embrace these concepts that draw a line in the sand and calls on the bond holders to reduce their debt, calls the veba payments to be equitized and at least put these companies on solid footing.
GERSH: While GM said it was encouraged by the White House announcement today, the bond market was more cautious. You can now buy GM's debt for $0.15 to $0.20 on the dollar. And the UAW figures, even if their members worked for nothing, it wouldn't be enough to help GM and Chrysler survive into the new year. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York. There is no simple answer to the question what if? What if the American auto industry fails? No answer because failure could take many forms. Economist Cary Leahey says the worst case scenario would mean GM, Ford and Chrysler all suddenly going out of business. That would push the unemployment rate into double digits.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: The 250,000 workers that could potentially get laid off, the direct auto suppliers that add another half million to that giving you three quarters of a million. Then all the indirect effects of all the people working in the region who, you know, people who clean homes, people who deliver flowers, K-Mart, Wal-Mart, you name it.
GURVEY: But it is more likely there will be a controlled downsizing of one or more of the companies. And over time production will shift to foreign auto makers who even now are building new plants in the U.S. Bank of America's Mickey Levy says there will always be demand for autos.
MICKEY LEVY, CHIEF ECONOMIST, BANK OF AMERICA: Even if those autos in the future are not produced by the big three auto makers, they'll be produced by other auto makers who will need workers. And so yes, we face a transition. But the net decline in jobs in the auto sector will not be nearly as large as some of the skeptics and big three auto advocates are now expressing.
GURVEY: Still, the Center for Automotive Research says even if other car makers increase employment over time, there will be a significant net loss of jobs if the American three fail, with as many as a million jobs permanently gone three years down the road. And Cary Leahey says the economic impact of any cutbacks in the American automotive industry will only exaggerate the deep recession we are already in.
LEAHEY: With the economy already falling probably 5 percent in the fourth quarter which is a staggering decline by itself, you'd be talking about another decline in GDP. In the short run of another 4, 5, even 6 percentage points, so the economy would be in a true free fall as you try to get from a period where you lose a couple major auto makers to filling up the gaps with increased production by overseas suppliers and perhaps whoever remains.
GURVEY: There was a time when the U.S. auto industry amounted to 5 percent of GDP. It is now somewhere between 2.5 and 3 percent. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
